Understanding the Value of Cost Containment and Purchased Services for Hospitals

Hospital CFOs face a number of unique challenges in the ever-shifting environment of today’s healthcare. Rising pension contributions, skyrocketing pharmaceutical prices, and the constant need to invest in technology has driven expense growth.

In fact, a report by Standard & Poor’s says that the expenses have outpaced revenue growth for healthcare systems in the United States for the first time since 2008.

The problem for many hospitals is cost containment. Purchased services is one solution.

Expense Growth Now Outpaces Revenue Gains

2017 Moody’s Investors Service report says that, at 7.2 percent expense growth versus 6 percent revenue gains, annual expenses eclipsed annual revenue growth for not-for-profit providers in 2016, potentially narrowing margins and spurring even greater merger-and-acquisition activity.

The number of hospital consolidations jumped an astonishing 13 percent in 2017, according to a Kaufman, Hall & Associates, LLC report entitled, “2017 in Review: The Year M&A Shook the Healthcare Landscape.”

Increasing labor costs also accelerated expense growth, according to the Moody’s analysis of 323 hospitals and health systems.

Hospital CFOs Searching for Solutions to Increased Labor Costs and Expense Growth

Hospital CFOs are painfully aware of skyrocketing labor costs and expense growth and are extremely interested in investigating cost containment measures that do not negatively affect patient engagement.

Perhaps one of the most effective cost containment measures is the use of purchased services.

An astounding 98 percent of hospital leaders are trying to decide whether to work with third-party vendors both clinical and nonclinical functions, according to a survey of C-suite, hospital boards and senior managers from 709 hospitals and inpatient organizations by Black Book Market Research LLC.

Nine out of ten hospitals considering outsourcing to provide clinical expertise in hopes of delivering value-based care at the highest quality possible.

Execs Interested in Cost Containment, Annual Health Care CEO Survey Says

Value of Cost Containment and Purchased Services for Hospitals

Advisory Board’s most recent Annual Health Care CEO Survey of 146 C-suite executives, conducted from December 2017 to March 2018, strongly supports the case for cost containment.

An overwhelming 62 percent of the executives surveyed said they “were extremely interested” in cost control. At 56 percent, finding “innovative approaches to expense reduction” was the second most important priority of those surveyed. Fully half of the survey respondents said that meeting rising consumer demands for service was also important.

The results of the survey suggest that hospital executives are more interested right now in cost containment than they are in revenue growth.

The Advisory Board survey also asked respondents to rate 33 issues according to their top-level concerns. Preparing their enterprise for sustainable cost control and innovative approaches to expense reduction were in the top five areas of concerns for the 146 hospital and health system C-suite executives responding to that 2018 survey.

Outsourcing Operations to Purchased Service Providers May Be the Key

Health systems are responding through standardization of purchases and clinical operations, slowed hiring rates, and restructuring of corporate overhead. Many are outsourcing services, such as laboratory, obstetric, and real estate management.

Outsourcing can make sense for organizations that have substantial variations in spending across facilities. It may also make sense for hospitals and other healthcare organizations that are trying to stay ahead of the curve when it comes to cost containment today and the potential for revenue growth tomorrow.

Purchased Services is Not a “One Size Fits All” Solution

While outsourcing can provide significant cost containment value, many executives are reluctant to make deep staffing cuts or outsource services out of fear of sacrificing culture and employee engagement.

Using the right purchased services can help CFOs and other executives contain costs while driving value for their organizations. Deciding which services to perform in-house and which to outsource can be tricky.

What works for one hospital might not work for another – success depends largely on the specific needs, available resources, and objectives of each individual organization. “As a neutral, unbiased third party, Soriant empowers our clients with industry benchmarks, best practice comparison, and data-driven recommendations to help direct the best choice for your organization” says Erik Scott, CEO.

Hospital CFOs Searching for Solutions to Increased Labor Costs and Expense Growth

Focusing Purchased Service Efforts on Ways that Drive Value

Becker’s Hospital CFO Report lists four key points that can help hospital CFOs focus their purchased service efforts in ways that drive value for their hospitals:

  • Purchased services affect the institution’s revenue and cost structure
  • Leadership engagement is often necessary to drive improvement of purchased services
  • The purchased services supplier market will likely continue to mature and gain complexity
  • Despite the challenges of managing purchased service contracts, it is worth the effort

A thorough analysis of the consequences resulting from the shift towards purchased services, such as changes in the organization’s up-stream and down-stream processes, levels of control, time to market, flexibility, and economy is essential to determining the potential value purchased services can bring to a particular institution.

In the past, hospitals embraced purchased services to improve the performance of the service provided, to transform a fixed cost into a variable cost, and to reduce the overall cost of providing a service.

Hospitals once viewed cost containment practices as a reasonable approach to weathering temporary storms. Many of the forces currently affecting provider margins are more permanent, such as an aging population and dwindling Medicare and Medicaid reimbursements, so many hospital CFOs are looking at purchased services to help mitigate many of the cost containment challenges they face.

Hospital consulting can help CFOs get the most out of purchased services.  Benefits may include improved cost containment and even the possibility of revenue growth.

Soriant is the Cost-Containment and Purchased Services Solution Hospitals Need to Stay Ahead of the Curve

Soriant partners with hospitals and health care systems to identify cost savings strategies and optimize operational performance with a focus on quality to improve patient care.

Having subject matter experts on staff, Soriant specializes in the niche areas of non-clinical support services. Through an assessment, we work side by side with our clients to define the best go-forward strategy for your organization. For more detailed information, please visit www.sorianthealthcare.com.  To contact Jessica Rizzo directly jessica.rizzo@sorianthealthcare.com and view her profile https://www.sorianthealthcare.com/about/

By |July 27th, 2018|blog|

About the Author:

Jessica joined Soriant Healthcare in 2016. As Senior Director of Client Solutions, she has direct accountability for organic growth strategies. With over 16 years of healthcare experience, Jessica believes in investing the time to truly understand what the client is experiencing and mutually developing a plan for long-term sustainable results. Jessica believes in fulfilling client expectations, building authentic business relationships, and working towards common objectives that are mutually defined.